Following the 2008 global financial crisis, regulatory authorities around the world have been working on measures to strengthen individual accountability of senior individuals within the banking sector.
The United Kingdom is, perhaps, the most well-known having introduced a new senior managers and certification regime, which forms the basis of an individual accountability regime through a clear and comprehensive allocation of responsibilities to the most senior executive managers and key non-executive directors. Another example is the Netherlands which introduced in 2015, a so-called “bankers’ oath”. In taking the oath, staff members at financial institutions pledge that they will perform their duties in good faith, to the best of their knowledge and by putting the interest of the customer first. If staff members do not take the oath or fail to live up to it, financial institutions may impose sanctions on their employees. The Netherlands also introduced a 20% bonus cap which is only applied to financial enterprises and established a specific department called “Governance, behaviour and culture”.
Closer to home, in Hong Kong there was introduced on 18 April 2017 a new manager-in-charge regime that introduced measures that heightened senior management accountability at licensed corporations, increasing their awareness of their obligations.
Currently, in Australia the ASIC has developed an internal document entitled Culture Indicators for Surveillance, which is a tool to incorporate consideration of a firm’s culture into their surveillance work. The ASIC has also established an Office of the Whistle-blower which oversees the handling of whistle-blowers across ASIC teams, including ensuring that the whistle-blower is kept informed, to the extent possible, about what actions the ASIC is taking in response to their information. The unique example is the “Two Strikes Rule”, which requires an advisory vote on the remuneration report at the annual general meeting. However, this has attracted much criticism by companies since its introduction in 2012, who say that the rule is causing a distraction for directors. This debate, however, triggered an increased tendency for companies to more actively engage with their shareholders on matters of remuneration and other matters.
In the recent 2017 Federal Budget the Australian Government announced a number of legislative measures including one that will increase individual accountability in the banking sector which is modelled on the UK’s senior managers’ regime. The new regime is called the Banking Executive Accountability Regime (BEAR). In addition, the recently released Sedgwick Retail Banking Remuneration Review Report, initiated by the Australian Bankers’ Association, made 21 remuneration and governance related recommendations designed to improve the culture of banks through ensuring an increased focus on the customer and a reduced focus on sales outcomes.
The key areas of BEAR are as follows:
- Senior executives and directors of authorised deposit-taking institutions (ADIs), including all banks, will be required to be registered with APRA
- The ADI will have to advise APRA prior to making a senior appointment. APRA will therefore have visibility over all ADI senior appointments prior to them being made.
- ADIs will be required to provide APRA with accountability maps of senior executives’ roles and responsibilities to enable greater scrutiny at the time of each person’s appointment and oversight of problems that emerge under their management.
- APRA will be given stronger powers to remove and to disqualify senior executives and directors. These powers will apply to all institutions regulated by APRA.
- Expectations will be established on how ADIs and their executives and directors conduct their business consistent with good prudential outcomes. These expectations will cover matters such as conducting business with integrity, due skill, care and diligence and acting in a prudent manner.
- A new civil penalty will be created with a maximum penalty of $200 million for larger ADIs, and a maximum penalty of $50 million for smaller ADIs, that fail to meet the above expectations.
- APRA will be able to impose penalties on ADIs that do not appropriately monitor the suitability of their executives to hold senior positions.
In addition to increasing individual accountability the Australian Government is also focussing on remuneration. For example it will mandate that a minimum of 40 per cent of an ADI executive’s variable remuneration – and 60 per cent for certain executives such as the CEO – be deferred for a minimum period of four years. APRA will also be given stronger powers to require ADIs to review and adjust their remuneration policies when APRA believes such policies are not appropriate.
At present the Australian Government’s proposals raise various questions which have not yet been answered. For example, it is not clear which accountabilities should be included in the accountability mapping exercise and therefore it is not entirely clear which senior executives and/or directors are likely to be in-scope of BEAR. It is also not clear how BEAR will apply to international banking groups with subsidiaries or branches operating in Australia.